Introduction
This paper is based on a project which explores the link between New Zealand’s financial system and economic performance
Economic performance is influenced by a wide range of factors including the level of development of the financial system. This paper is based on a joint project by The Ministry of Economic Development and Treasury to examine the link between New Zealand’s financial system and economic performance. This builds on earlier work undertaken by Treasury on financial systems and economic growth[1].
The aim of the current project is to explore the proposition that: “among other factors, a lack of saving and financial development may be constraining the growth and productivity performance of New Zealand firms”.
Until recently the focus was on ensuring the fundamentals were in place
Until recently, policy orthodoxy in relation to financial system development has largely focussed on ensuring that the fundamentals were in place - a stable macroeconomic policy and sound tax and regulatory policies. While our work does not challenge the importance of these policies, it does begin to question whether these policies are sufficient by themselves and whether more emphasis should be given to pro-savings policies and other policies specifically aimed at financial sector development.
KiwiSaver and recent tax changes represent a significant development in savings policy
The announcement by the Government of the KiwiSaver enhancements in Budget 2007 and the recent reduction in taxation of collective investment vehicles represent a significant development in savings policy. A background paper on saving recently released by the Treasury (2007)[2] is complementary to this study.
This paper discusses:
- The role of the financial system and the features which are important for economic growth.
- Our preliminary assessment[3] of the strengths and weaknesses of New Zealand’s financial system based on available evidence.
- Some of the factors contributing to underdevelopment of New Zealand’s financial system including: New Zealand’s low saving performance; high degree of foreign ownership; lack of very large firms; a relatively high incidence of co-operative and state-owned enterprise governance structures; relatively high cost of capital and potentially limited demand for capital.
- The benefits of sustained national saving for financial system development and potential knock-on effects for firm growth and productivity.
- Policy options for promoting financial system development.
Notes
- [1]Refer Claus, I., V. Jacobsen and B. Jera (2004) ‘Financial Systems and economic growth; An evaluation framework for policy’, Treasury Working Paper 04/17.
- [2]Refer Treasury (2007) ‘Saving synopsis of theory, evidence and recent Treasury analysis on saving’.
- [3]This is a preliminary assessment and is by no means fully comprehensive. There are other factors which could also be impacting on financial system development such as the small size of the New Zealand economy.
